William Watson: Ryan plan’s secret: more tax revenue

Paul Ryan budget plan's secret is more tax revenue

Question: Of the four candidates for national office in the United States this year — Obama, Biden, Romney and Ryan — which wants to double Americans’ taxes over the next decade and see the share of taxes in GDP rise by three percentage points?

If your answer is Obama or Biden, you’d be wrong. The correct answer is in fact Representative Paul Ryan, whom Mitt Romney just chose as his running-mate. Mr. Ryan, Chair of the Budget Committee of the House of Representatives, is the author of or at least principal spokesman for “The Path to Prosperity,” a budget plan he brought out early in 2011 in an attempt to end congressional gridlock on taxes, spending and deficits.

By restraining government spending and lowering the top tax rate while broadening the base, Mr. Ryan does what he’s accused of failing to do — he raises overall tax revenue enough to tame the U.S. deficit.

The summary tables to that document contemplate federal revenues rising from $2.4-trillion in 2012 to $4.6-trillion in 2022 — basically a doubling of revenue and in absolute terms a whopping $2.2-trillion increase. At the same time, federal government outlays rise from $3.6-trillion in 2012 to $4.8-trillion in 2022, an increase of 50%. Not nearly as much as the rise in taxes but not chicken feed, either.

A Republican rebuttal that focused on the unfairness of insider deals in Washington could well resonate with lots of voters

Now, there are many grounds on which to criticize these numbers. They’re in nominal dollars so they don’t take inflation into account and as a result exaggerate the real growth of taxes and public spending. They’re not based on any very detailed analysis. They make assumptions that may turn out to be heroic about economic growth. They can’t even be relied on as a rough estimate of first fiscal steps since in the U.S. system, unlike our own, the legislature routinely alters presidential budgets beyond recognition. The president’s numbers may start the debate but Congress finishes it. And so on and so on.

But in an election season — and it has been election season in the U.S. for 18 months now — everyone understands that such numbers are more the result of political calculation than arithmetic. What’s politically interesting about Mr. Ryan’s numbers is that, right there in black and white, tax revenues rise so much, from 15.8% of GDP in 2012 to 18.7% in 2022, just under three full percentage points. True, spending falls more, from 23.4% of GDP to 19.8%, or by 3.6 percentage points. But still. By the current standards of U.S. politics it’s a balanced package.

Mind you, it doesn’t actually get the U.S. federal budget back into balance. The deficit is still 1.2% of GDP in 2022. But it does get the overall debt falling as a share of GDP, which puts the U.S. government back on a sustainable fiscal path. You can keep the debt growing forever — if you think that’s a good idea — so long as the economy is growing faster.

Unlike Mitt Romney, who doesn’t want to change income tax rates in the short term, Mr. Ryan’s plan envisions a two-rate system: 10% and 25%. The increase in revenues comes from economic growth and from simplifying the tax system, a policy that could be pleasingly populist.

Ordinary folk are less angry with rich people as a type — Steve Jobs was both rich and widely admired — than with rich people who seem to have come by their money by hook, crook and loophole

“A [tax] code with high rates and lots of loopholes benefits those who can afford the best lawyers and lobbyists in Washington,” declares Mr. Ryan’s document, which includes a graph showing that the infamous top 1% of income-earners now averages more than $250,000 in tax savings from exemptions and credits while those in the bottom 20% get virtually nothing. In a stark and disappointing departure from his healer, hoper and unifier campaign of 2008, President Barack Obama in his current commercials is running against those who want to cut taxes for rich people and loosen regulation on banks. (Is there anything dumber, by the way, than the “I’m Barack Obama and I approved this ad” tag-lines to spots in which Mr. Obama speaks continuously into the camera? He’s Barack Obama and maybe he doesn’t approve of what he just said?)

A Republican rebuttal that focused on the unfairness of insider deals in Washington could well resonate with lots of voters. Ordinary folk are less angry with rich people as a type — Steve Jobs was both rich and widely admired — than with rich people who seem to have come by their money by hook, crook and loophole. If Mr. Obama can be painted as a friend to lobbyists, which is not far-fetched given his penchant for subsidizing this and that, his popularity will suffer. Such an attack would be perfectly hypocritical, of course. The Republicans did not oppose all of the 2,400 separate changes that Mr. Ryan says have been made in the tax code since the great Reagan reform of 1986. Far from it. But hypocrisy in politics won’t shock anyone.

What’s most interesting about both the Ryan and the Romney economic plans is how conservative they are in the strictest sense of that word. Mr. Romney’s target for federal spending is 20% of GDP, which has been its historic level. (“Since the 1950s,” his document says, “federal spending has hovered around 20% of GDP.) Mr. Ryan’s target for federal tax revenues is 19% of GDP, also justified by consistency with “the historical norms of 18% to 19%.” Mr. Obama and Mr. Biden, by contrast, are willing to go higher-than-historic on both taxes and spending.

The Democrats seem delighted that, with Mr. Ryan’s entry into the race, the battle will now be “ideological,” as if Mr. Obama and Mr. Biden don’t have ideologies. Like most elections in most countries, it’s going to be about whether public spending and taxes are going to be a point or two of GDP higher or a point or two lower. Thanks to Mr. Ryan’s candour about the need for tax revenues to rise, it can now proceed in a more adult way.

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